Introduction to Strategic Management for International Enterprises
Strategic Management involves developing and implementation of the major goals and initiatives which are taken by the top level management for the assessment of the internal and the external environments in which the organizations competes. It provides direction to the company and specifies the organizational objectives as well as develops plans and polices to achieve these goals and then allocate the resources in order to accomplish the plans. It is the process of determining the short term goals and objectives of the company (Philippe, 2012). Strategic management also helps the company to Synthesis the data and analyze uses as inputs for the strategic thinking in implementing the strategy. There are two main processes which includes formulation and implementation of the strategy (Theodore and Gregory, 2005). The company undertaken here is Nestle which is a Swiss multinational food and beverage company headquartered in Switzerland. The purpose of this report is to have understanding about the different concepts and theories and also about the multiple variables such as social, cultural, and economic.
About the CAGE framework
It is known as cultural, administrative, geographic and economic. This framework helps the company in identifying the international strategies. It is used to understand the patterns of the company capital, trade, information and the people flows. This model is also used to link the interactions with the other countries to product their sizes (Wheelen and Hunger, 2011). It assists the management of the company to take decisions which are feasible for the business. To apply CAGE framework, identify the locations that offers low raw materal costs, access to markets or consumers or other important decision criteria. It is also used in comparing the markets from the view of a prticular country.
1.0 Operational requirements of different international business strategies
While running any organization, there are different operational requirements of the international business strategies which need to be adopted by the firm in order to achieve the goals and objectives of the business (Luo and Tung, 2007). There are four main issues which are involved in the Nestle international business strategy that are-
Firstis the Substantive market base that helps the Nestle to enter into an international market ahead of its competitors so that they can build a substantial market base to strengthen its competitive advantage (Klein, 2009). They are not discriminatory when it comes to the choice of the international market destination. This is the reason why Nestle is represented in the most developed countries as well as less developed ones. Nestle avoids the challenge of providing general food products to the public. On the contrary, it has divided its market into several niche so that, each of them is served with products which suit its needs and demands. Nestle attempts to gain a larger share of each niche before the competitors get into the market.
Secondly, Nestle's internationalization strategy is adaptation as opposed to standardization market strategy (Hill, Jones and Schilling, 2014). Nestle understands that, food has cultural ramifications It means different things to different people hence instead of using global ingredients for its products, Nestle rather opt for the localization where local ingredients are used to produce for the customers. It suggets that how Nestle applies localization abounds in the current literature. However, it is not only with respect to products and services that Nestle has been able to localize its operations (Grunig, 2006). The company has shifted from the challenges that assailed competitors such as Procter and Gamble and Unilever in the Chinese and most Asian markets by assembling and training domestic staff and managers to take charge of the management and strategic direction of these companies.
Nestle uses a multi-domestic strategy hence it operates in highly decentralized organizational structure (Doh, 2005). The locally sourced managers are seen to be better in tune with local markets and are given the freedom to develop appropriate marketing strategies to match the local needs.
Another dimension of the internalization strategy of Nestle is that, they have used the strategic alliances and acquisitions (Barney and Hesterly, 2008). Nestle enter into strategic alliances with companies that have some capabilities that will be beneficial to them which they cannot develop internally.
However, it can be also said that, the Latin American firms are also similar to the Chinese and Indian firms while adopting international business strategy.
2.0 Costs and Benefits of International Entry and development routes
There are different costs and benefits which are involved in international entry and development routes that are-
Primary motives- For most of the organization, profitability is of major concern. In order to make profit the organization can sell their products in the foreign markets if the expansion in the home market is difficult (Cavusgil and Knight, 2015). Profitability also depends on competitiveness, so international expansion may be a way of reducing costs in a competitive international market. Access to international markets increased the scale of production, leading to lower unit costs. Economies of scale are particularly important for a company like Nestle whose home market in Switzerland and it is relatively small as compared to the other countries.
The Changing international environment- In broad terms, the main nation that are involved in the international business activity has experienced an unprecedented period of peace and stable international business relations (Cao and Dupuis, 2009). In the present context, the firms of China and Europe have the opportunities for international trade and investment. The increased rate of growth in the international business activity has not been possible without the crucial developments in the production and the information technology in the quality of Human capital.
Country Specific factors- The general international environment influences the overall internationalization decisions in order to do business in a particular country which is primarily affected by the conditions in the country concerned.
Cost reduction- It is not uncommon for the business to offshore some of its operations, suppliers and other components or relocate a production facility to another country in order to reduce the costs (Philippe, 2012). For example- a number of Indian banks and Chinese companies have merged with each other to reduce the cost.
Access to resources- It is an important reason that why a foreign investor may be attracted by the resources are where a specialized resource such as highly skilled labor is relatively immobile (Wheelen and Hunger, 2011). On the whole, resources have become less important for internationalization in the modern world, as highly transferable knowledge and technology have acquired greater importance than natural resources in many industries.
However, mergers and acquisitions have become an integral part of businesses around the globe which have a major impact on the international business entry and development routes. Mergers can be of different nature it can be a horizontal, vertical or conglomerate merger. Mighty businesses usually tend to increase size by purchasing small or troubled businesses; these acquisitions can be hostile or gentle sometimes (Peng, Wang and Jiang, 2008).
3.0 Impact of cultural differences
In general, management does not bother about the problems created by cultural differences and these differences can sometimes turn into organizational challenges. The change which is to come after the mergers and acquisitions is resisted by the internal members because top managers usually don't address such changes properly which create confusion and lack of trust among the employees of the acquiring company and the acquired company (Nag, Hambrick and Chen, 2007). In this the impact of cultural differences among the merging firms can disturb the purpose of transition and integration process, thus these cultural differences become a hurdle to achieve the goal for which external restructuring was adopted.
In the present context Nestle have use the strategic alliances and acquisitions. Nestle enter into strategic alliances with companies that have some capabilities that will be beneficial to them which they cannot develop internally (Luo, and Tung, 2007). The deal seems to be very attractive and juicy. However the result of merger started to deviate from the expectations and the main reason behind this is the internal norms of the companies are completely different and such cultural differences were not preempted by the heads of any organization properly. Therefore the work environment of the companies create troubles for the employees.
The other problems that are related to empowerment and lack of trust among the employees of Nestle and other companies, because employees of the Nestle have to get permission from the other companies in order to execute any decision (Klein, 2009). As a result of which some executives and middle level managers of nestle and other companies resigned from the posts. All this chaos and conflicts gave birth to the unproductive work environment resulting in one of the largest acquisition failures. However, the impact of business culture in Latin American firms is completely different throughout the region. There is a lot to do with the size of the country and the extent to which it has developed a modern industrial sector, and its openness to outside and the global economy.
For instance in Latin American firms where people identifies largely with groups, people tend to look for the support within the group (Husted and Allen, 2006). As soon as the merger and acquisition is announced first calls to action proclaimed by making the lists. Personal and departmental needs drive the allocation of resources. Quickly after the merger and acquisition is done there is widening disconnect between the financial and the market based goals of the merger and the real time allocation of effort. In case of international merger and acquisition, the economic value of the foreign organization may not be where its Latin American firms expect it (Hitt, Ireland and Hoskisson, 2012). For example a Latin American company acquiring a company operating in a country where the government controls the much of the economy may find that the value of its new acquisition lies more in the personal ties between its managers and high level government officials than in its quality of the service.
4.0 Core competencies to manage a diverse international organization
Every organization has its own resources which has help the company to develop some capabilities and core competencies. Because of that core competences Nestle has managed to achieve some competitive advantage in the business. While nestle has lot of resources and competencies which enables the company to have competitive advantage over the others. Nestle has created a future road map which has facilitated a very strong alignment with the company itself and the scope for soul searching (Grunig, 2006). The people at Nestle are more capable to live up to their potential and uplift the company to eminent heights to deliver the promised good and food life to the customers. The core competencies of the company is described below-
Innovation and Renovation- The company has strategically planned to sharpen its inherent capability of innovation and renovation even further. It indicates innovation in terms of products, processes and the systems. Through innovation there is a introduction of new, path– breaking products to the Nestle portfolio while renovation signifies rejuvenation of the already existing products (Hill, 2008). The main idea is to add up an element of excitement to the brands . The road map calls for the existing supply chain to be the best in the industry in order to ensure that the freshest raw materials create the best products and they reach the customers in the fastest possible time.
Operational efficiency- It represents the elimination of wastage, enhance effectiveness, amplified efficiency and an improvement in all the operational facets, which is an improvement in the core competency (Grunig, 2006). Ushering in innovative products via the innovative path is the main aim for the organization to achieve goals and objectives in the organization.
Increased Customer Communication- Addition of more dynamicity in customer communication, making them aware of all the new happenings at Nestle (Griffin and Pustay, 2005). By Establishing the two way communication channel , so that customer feedback and product experience can be used to develop the new and innovative products.
However, there are five factors and core competencies that are important for the Latin American company to expand form local to global leader.
- Availability and retention of the qualified senior executives to drive expansions and international operations.
- Access to the capital markets
- Market leadership position in the country of origin.
- Ability to make international acquisitions and joint ventures.
- Use of best practices of the corporate governance.
These are the factors for the Latin American company to compete effectively and maintain performance globally.
5.0 Elements required to provide an environment
The elements that are required to provide an environment which promotes innovative practice, analytical insights, critical evaluation and judgment, systematic learning, positive initiatives, adaptability and open mindedness. By this elements the strategy can be implemented. Innovation is the first step in the innovation process (Freeman, 2010). The development of a sustainable culture that expects and encourages innovation at every level and function of the organization actually under girds each element of the innovation framework. There are number of approaches that support innovation which are-
Demonstrate leadership and intentionality- Innovation requires visible and vocal top management commitment, supported by aligned resources and incentives. Once leaders give their signal of support for innovation, they open a call for innovation to all. At the same time, leaders must find some people with core competencies in innovation to lead specific efforts to integrate innovative pursuits (Doh, 2005). An organization that wants systemic commitment to innovation will want to recruit, train, nurture, and reward innovative behavior of staff and leaders.
Democratize innovation- Not all innovation is completely new; in fact, innovation most often is a pinch on an existing idea or the unexpected just a position of existing ideas. As such, innovation can come from anyone and anywhere. This is leading to more extensive organizational practices to discover internal innovation as well as to open up to external ideas and processes (Czinkota and et.al., 2009). Often referred to as the “democratization” of innovation, this practice recognizes and encourages a wide range of people to participate in the generation of new ideas, the translation and adaptation of existing ideas to new circumstances, and the combination of multiple existing ideas into a new concept. Empowering people is essential. If it is a good idea that can be prototyped, implemented, refined and disseminated, the source is of little importance.
Experiment and Learn- Effective experimentation and learning requires a commitment to trying new things and clear methods for capturing information and transforming it into insight that accelerates innovative thinking and actual innovations.
Run the risk- Successful innovation efforts cultivate a climate of smart risk-taking and make a point of learning from, not punishing, failure (Cavusgil and Knight, 2015). At the same time smart organizations don’t confuse low or non-performance with the more creative “failure” of innovation efforts. Be clear on what is an appropriate and acceptable risk tolerance for your organization and adapt an approach to innovation to match that level of risk tolerance—financially as well as strategically.
Communicate- Good communications practices are essential to an innovation culture. Organizations need a process to create and share information in order to reduce uncertainty generated around innovation and the change it produces. Linked to the learning dimension of innovative culture, the communications’ capacity enables broader participation in the innovative process (Cavusgil and et.al., 2014). Good communications enable organizations to welcome innovations and innovators; poor communications can contribute to the destructive temptation for one person or faction to “kill off” the innovations of others in order to keep their own competitive advantage.
On the basis of the above analysis of the operation of the Nestle the following recommendation need to be proposed to enhance the internationalization prospect of the Nestle.
They have to focus on the internationalization strategy but there main focus is on emerging economies due to high market size and lower cost of productions which are the essential conditions for the success in the market (Cao and Dupuis, 2009).
The merger and acquisition and the joint venture strategies are important for the management to gain major inroads into very difficult market and leverage the competitive gap with domestic and international competitors (Burt, Johansson and Thelander, 2011). In this regard the company is encouraged to acquire more firms and enter into strategic alliances with the important ones to narrow the competition.
In order to expand in the international market Nestle have to follow the niche strategy. It means the company have to invest in more product development in terms of breadth and width to be able to access more and more customers.
Localization is also the main important aspect to internationalization by the company and this must be perused by the company to expand the business.
Getting Aggressively - Once Nestle have established a segment focus, they have to acquire aggressively within the market (Barney and Hesterly, 2008). Acquisitions have allowed them to gain market share, to have economies of scale, reduce manufacturing costs and have access to new technologies and patents. Nestle in a price competition; technologies and patents would enable them to accelerate their innovation progress, which would otherwise slowdown. Given Nestle's current financials, they should start by acquiring the smaller companies within the focused market segment, and try not to pay premiums for the expected activities.
Based on the above report, it concludes that strategic management plays an important role in the international business. Also implementation of the strategic management have a positive relationship with the organizational profitability. To accomplish the objectives and goals management need to have a positive framework towards the use of strategic management. The success of the business or the strategy primarily depends on the value judgment, energy and skill of its top managers and the implementation of the strategy. In this report it has also studied that merger and acquisitions also plays an important role in identifying the profitability of the company.
- Barney, J. B. and Hesterly, W. S., 2008. Strategic management and competitive advantage: concepts and cases. Upper Saddle River, NJ: Pearson/Prentice Hall.
- Burt, S., Johansson, U. and Thelander, Å., 2011. Standardized marketing strategies in retailing? IKEA’s marketing strategies in Sweden, the UK and China. Journal of Retailing and Consumer Services. 18(3). pp.183-193.
- Cao, L. L. and Dupuis, M., 2009. Core competences, strategy and performance: the case of international retailers in China. The International Review of Retail, Distribution and Consumer Research. 19(4). pp.349-369.
- Cavusgil, S. T. and et.al., 2014. International business. Pearson Australia.
- Cavusgil, S. T. and Knight, G., 2015. The born global firm: An entrepreneurial and capabilities perspective on early and rapid internationalization. Journal of International Business Studies. 46(1). pp.3-16.
- Czinkota, M. R. and et.al., 2009. International business. Dryden Press.